Forex: Dollar and Equity Quiet Unlikely to Last

DailyFX

Talking Points:

  • Dollar and Equity Quiet Unlikely to Last
  • Japanese Yen Advances on Building Risk Aversion Trend
  • British Pound Ready for Another Monetary Policy Volatility Spike

Dollar and Equity Quiet Unlikely to Last

The volatility measures paint the picture well for the dollar, broader FX landscape and general capital markets. Conditions are quiet. Too quiet. Though we are modestly higher than the six-year low set earlier this year; the benchmark VIX Volatility Index for the US equity market is hovering around 14 percent – extending a steady trend of complacency and leveraged risk-taking. This indicator is a perfect complement to the benchmark equity index that it represents (the S&P 500) and thereby paints the picture of speculative positioning. The equity index represents the ‘market’ return – the rate which investment managers must beat to justify their fees. However, stocks are reinforced by the expectation that any significant correction will be met by a central bank intervention that puts it back on track. In turn, we have seen only modest corrections since the climb began back in 2009. Beating such a consistent measure (‘generating alpha’) means having to dip into exceptionally risk positions for more vigor and using leverage to amplify returns in a exceptionally low yield market. This sets up explosive market conditions.

When we look at the dollar’s overall positioning against a backdrop of such wanton risk, its performance is rather impressive. For a reserve currency, it is performing quite well in the scramble for leveraged returns. Yet, that quiet strength may not turn into a full-blown structural headwind for some time. While the greenback is well positioned for a disorderly – though likely short-lived – deleveraging effort, an active catalyst is needed to turn the virtuous cycle of speculative ramp into a vicious cycle of panicked selling. The FOMC’s policy decision this past week was one of the most obvious high-profile triggers, but it was defused by the ‘no Taper’ outcome. Is there a comparably important and obvious catalyst we can now turn to focus market participants’ fears? While a self-realized sentiment shift (technical traders would call this a cascading stop run) would be the most enduring driver, there is a growing threat from the standoff in Washington.

If Congress does not put together a budget that the US President will sign off on by the end of this month and/or raise the debt limit soon after, the government will run out of funds and be forced to suspend some of its facilities. The consensus has been that there would not be a brinkmanship situation like we witnessed at the beginning of this year, there seems to be little progress and the clock keeps ticking. There is enough concern that rating agency Moody’s has warned that a government shutdown could undermine the United States ‘Aaa’ credit rating. Heavy markets moves are derived from the unexpected and/or structurally-important developments. If this metastasizes, it will be both.

Japanese Yen Advances on Building Risk Aversion Trend

The yen crosses were universally lower through Tuesday’s close. While the Japanese currency generated gains of less than 0.4 percent against most of its liquid pairings, the consistency speaks to the fundamental theme – lacking for amplitude though it may be. A more dramatic tumble from the yen crosses would best be served by a concerted risk aversion move reflected in a selloff of global equities – not just the Dow Jones Industrial Average’s 4-day drop to reverse its post-FOMC rally. In the meantime, globalyields have retreated in the ‘No Taper’ fallout which in turn curbs the recent carry trade build. As for local fundamentals, discussion of the impending tax hike adds some bearish pressure.

Euro Investors Unfazed by Renewed Budget Concerns

A number of Eurozone members have updated their budgets over the opening 48 hours of the trading week, and the numbers are uneven. Portugal reported its deficit is larger than the target (reinforcing the S&P’s credit watch shift the day before), Spain’s deficit through August grew, and Greek officials are suggesting they will reach a primary surplus on their current negotiated path. Yet, the benchmark bond yields of all three countries have shrunk. We need to look to more sweeping concerns: scaled up risk trends or rising short-term rates that trigger stimulus.

British Pound Ready for Another Monetary Policy Volatility Spike

Both the sterling and the benchmark 10-year government bond (Gilt) yields have climbed over the past two months. These moves were based on a common fundamental driver: an improved rate outlook for the UK economy. The market has responded to the BoE’s rejection of QE and more balanced view of the economy as reason to reverse a stimulus discount. However, in that shift, we have seen the market go further than just a rebalance to neutral. Monetary policy officials have lamented that the market’s seem to be pricing in rate hikes well before the central bank’s forward guidance vow of 2016. Today’s Financial Policy Committee meeting statement won’t likely take up the speculative fight.

Australian Dollar Will Topple if Bond Yields Drop Below 3.80

This morning, the RBA released its Financial Stability report. The tone of the statement was conspicuously more restrained in its optimism, but it was not an outright warning. More interesting was the auction of A$800 million in 3-year, 4.75 percent bonds. This auction is ‘regular’ and not on a longer maturity, but it reflects a more important factor for this carry trade. Global investors direct their funds to Australia for yield. The demand for this auction was notably lower. If the 10-year yield on the secondary market drops below 3.8 percent, this carry trade will take a hit.

Emerging Markets Slowly Retreating from Last Week’s Confidence Swell

Since a round of stability measures were introduced and the Fed curbed Taper fears, we have seen volatility in the emerging market (and their exchange rates) cool. However, the situation is far from robust. Looking at the MSCI Emerging Market ETF, interest in the capital markets continues to retreat on fading volume. Meanwhile the Indian Rupee is down 0.8 percent, the Turkish Lira 1.0 percent and Indonesian Rupiah has plunged 3.8 percent this week. If a genuine risk aversion sentiment swept the market, this would be much worse.

Gold Losing Momentum or Building Breakout Pressure Above $1,300?

Gold was virtually unchanged for a second day through Tuesday’s close. Stability is an encouraging thing for a commodity struck by significant volatility this past week, but it is of the uneasy variety. Holding above $1,300, the risk of a further drop is palpable. The most influential catalyst for a breakdown would be a sincere advance from the US dollar – the benchmark currency the metal attempts to mirror. As it happens, the greenback’s most tantalizing spark would be wholesale risk aversion – an interesting situation for a commodity often considered a ‘safe haven’. Meanwhile, the 10-day or two-week actual (historical) volatility reading for gold futures is at a two month high.

**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar

ECONOMIC DATA

GMT

Currency

Release

Survey

Previous

Comments

1:00

AUD

DEWR Skilled Vacancies (MoM) (AUG)

0.7%

Last month was the highest print since February of 2011.

5:00

JPY

Small Business Confidence (SEP)

49.7

Small business confidence is currently hovering near pre-crisis levels.

6:00

JPY

Machine Tool Orders (YoY) (AUG F)

-1.8%

6:00

CHF

UBS Consumption Indicator (AUG)

1.41

The consumption indicator has failed to return to pre-crisis and pre-Euro-crisis levels.

6:00

EUR

German GfK Consumer Confidence Survey (OCT)

7.0

6.9

French business confidence manufacturing index is reach 2011 levels. Italy’s consumer confidence indictor will be heavily watched as rumors of a debt downgrade swirl.

6:45

EUR

French Own-Company Production Outlook (SEP)

2

6:45

EUR

French Production Outlook Indicator (SEP)

-18

6:45

EUR

French Business Confidence Indicator (SEP)

99

98

8:00

EUR

Italian Consumer Confidence Index s.a. (SEP)

98.3

98.3

10:00

GBP

CBI Reported Sales (SEP)

23

27

The survey calls for 23 vs. 24 estimates last week.

11:00

USD

MBA Mortgage Applications (SEP 20)

11.2%

Previous prints indicated that inventories fell last month. With demand remaining somewhat strong, it is no surprise that durable goods orders may do better MoM. Estimates were for -0.3% last week, but have since been surveyed higher to -0.2%.

12:30

USD

Durable Goods Orders (AUG)

-0.2%

-7.4%

12:30

USD

Durable Goods Orders ex Transportation (AUG)

1.0%

-0.8%

12:30

USD

Non-Defense Capital Goods Orders ex Aircrafts (AUG)

2.0%

-4.0%

12:30

USD

Non-Defense Capital Goods Shipments ex Aircrafts (AUG)

1.5%

-1.7%

14:00

USD

New Home Sales (AUG)

420K

394K

14:00

USD

New Home Sales (MoM) (AUG)

6.6%

-13.4%

14:30

USD

DOE U.S. Crude Oil Inventories (SEP 20)

-4368K

There is some talk by energy traders that crude inventories in Cushing are not of the quality stipulated by futures contracts.

14:30

USD

DOE U.S. Distillate Inventory (SEP 20)

-1079K

14:30

USD

DOE U.S. Gasoline Inventories (SEP 20)

-1627K

16:00

EUR

French Total Jobseekers Change (AUG)

10.0K

6.3

The French Total Jobseekers print has failed to decline significantly since before the financial crisis.

16:00

EUR

French Total Jobseekers (AUG)

3295.7K

3285.7k

16:00

USD

Household Change in Net Worth (2Q)

$3003B

GMT

Currency

Upcoming Events & Speeches

1:30

AUD

Reserve Bank of Australia Financial Stability Review

8:30

GBP

BoE Releases Financial Policy Committee Meeting Statement

12:00

EUR

ECB's Joerg Asmussen Speaks on Euro Economy

15:00

EUR

ECB's Jens Weidmann Speaks on Euro Economy

SUPPORT AND RESISTANCE LEVELS

To see updated SUPPORT AND RESISTANCE LEVELS for the Majors, visit Technical Analysis Portal

To see updated PIVOT POINT LEVELS for the Majors and Crosses, visit our Pivot Point Table

CLASSIC SUPPORT AND RESISTANCE

EMERGING MARKETS 18:00 GMT

SCANDIES CURRENCIES 18:00 GMT

Currency

USD/MXN

USD/TRY

USD/ZAR

USD/HKD

USD/SGD

Currency

USD/SEK

USD/DKK

USD/NOK

Resist 2

13.4800

2.0500

10.7250

7.8165

1.3650

Resist 2

13.4800

2.0500

10.7250

Resist 1

12.9700

2.0100

10.5000

7.8075

1.3250

Resist 1

12.9700

2.0100

10.5000

Spot

12.9631

2.0025

9.8661

7.7534

1.2554

Spot

12.9631

2.0025

9.8661

Support 1

12.6000

1.9140

9.3700

7.7490

1.2000

Support 1

12.6000

1.9140

9.3700

Support 2

12.4200

1.9000

8.9500

7.7450

1.1800

Support 2

12.4200

1.9000

8.9500

INTRA-DAY PROBABILITY BANDS 18:00 GMT

CCY

EUR/USD

GBP/USD

USD/JPY

USD/CHF

USD/CAD

AUD/USD

NZD/USD

EUR/JPY

Gold

Res 3

1.3585

1.6127

99.96

0.9217

1.0373

0.9492

0.8333

134.46

1356.47

Res 2

1.3559

1.6097

99.68

0.9196

1.0356

0.9466

0.8309

134.07

1348.55

Res 1

1.3532

1.6067

99.39

0.9175

1.0339

0.9441

0.8284

133.68

1340.63

Spot

1.3479

1.6008

98.81

0.9134

1.0305

0.9391

0.8234

132.90

1324.79

Supp 1

1.3426

1.5949

98.23

0.9093

1.0271

0.9341

0.8184

132.12

1308.95

Supp 2

1.3399

1.5919

97.94

0.9072

1.0254

0.9316

0.8159

131.73

1348.55

Supp 3

1.3373

1.5889

97.66

0.9051

1.0237

0.9290

0.8135

131.34

1356.47

v

--- Written by: John Kicklighter, Chief Strategist for DailyFX.com

To contact John, email jkicklighter@dailyfx.com. Follow me on twitter at http://www.twitter.com/JohnKicklighter

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